Understanding the Impact of the Upcoming CPI Report
A soft U.S. inflation report set to be released later today could potentially support risk assets, including Bitcoin (BTC). However, those hoping for significant bullish movements might be in for disappointment.
The Labor Department is scheduled to release January’s Consumer Price Index (CPI) report today at 13:30 UTC. Analysts predict a monthly increase of 0.3% in the cost of living for January, a slight slowdown from December’s rise of 0.4%. The annualized figure is expected to match December’s reading of 2.9%.
Core Inflation and Market Reactions
Core inflation, which excludes the often volatile food and energy sectors, is expected to see a modest increase to 0.3% month-over-month, up from 0.2%. This would yield an annualized rate of 3.1%, a slight decrease from December’s 3.2%.
If the data comes in lower than anticipated, especially regarding core inflation, it may enhance expectations for further interest rate cuts by the Federal Reserve (Fed). This scenario could lead to diminishing Treasury yields and a weaker dollar index, potentially increasing the appeal of riskier assets like Bitcoin. According to the CME’s FedWatch tool, there is currently a 54% probability that the Fed will either implement a single rate cut or refrain from any cuts this year.
Market Stability and Bitcoin’s Price Range
While an adjustment in the Fed’s rate cuts could provide a boost to Bitcoin, it is unlikely to serve as the primary catalyst for a breakout from its current consolidation range between $90,000 and $110,000.
Forward-looking market indicators suggest that inflation may rise in the coming months, largely due to concerns over trade wars. This implies that the Fed might have limited opportunities to enact aggressive rate cuts in the near future.
Data from Mott Capital Management reveals that two-year inflation swaps have surged to nearly 2.8%, the highest level since early 2023. A similar trend is observed in five-year swaps. The rise in inflation swaps indicates that the market expects higher inflation rates ahead, causing investors to pay a premium to hedge against potential losses in purchasing power through CPI-linked swap contracts.
Challenges to Rate Cuts and Future Outlook
These trends indicate that progress toward the Fed’s 2% inflation target has stalled, with price pressures likely to increase over the years, potentially influenced by tariffs imposed during the Trump administration.
Several investment banks also suggest that a soft CPI reading for January is unlikely to prompt a shift away from the Fed’s hawkish stance. In his recent testimony to Congress, Fed Chairman Jerome Powell reiterated that the central bank is not in a rush to lower rates.
RBC’s weekly note emphasized, “We don’t expect that progress on inflation will be enough to prompt additional interest rate cuts from the Fed this year,” noting that January’s data is likely to show limited easing in price pressures. BlackRock also commented on the persistent inflation in services, suggesting it will deter the Fed from cutting rates.
Potential Market Movements Following CPI Release
In conclusion, if the CPI report comes in higher than expected, Bitcoin could gravitate closer to the lower end of its $90,000-$110,000 trading range. Investors should remain vigilant as the CPI data unfolds, keeping an eye on broader market implications and the Fed’s future actions.
